Palestinians battle for stock market success

LONDON, England (CNN) -- After a troubled start to the decade, 2005 proved a golden year for the Palestinian Securities Exchange.

Trading values were touching $2.1 billion and the benchmark Al-Quds index made record gains of over 300 percent. But, it wasn't going to last long.

"The best point that we reached was in 2005 where the main indicators in the PSE have trebled at that time in terms of the number of listed companies, the number of investors both from inside the Palestinian territories and from Arab countries," says Sufyan Barghouti of the PSE, over the phone from Ramallah.

By 2005, the exchange had grown from just seven companies to 28 and confidence was growing. Investors from the Palestinian Territories and further afield were putting money in and it seemed that finally the PSE might be on an upward trajectory.

The pioneering businessmen behind Padico, the company which founded the exchange in 1996 were elated -- their foresight in planning and creating an exchange was finally being rewarded.

They had recognized the need for a well regulated, up-to-date market for securities in the Palestinian Territories and they realized their ambitions in conjunction with the Palestinian Authority in early 1997 when the first day of trading took place. Padico, under the charge of CEO Dr Farouq A. Zuaiter, still owns a little more than half the exchange today.

The financial successes of 2005 were short-lived and a year later, the exchange had lost almost 50 percent of its value.

According to PSE figures, 2005 turnover was just over $8.5 million and by 2007 it had fallen to more than $3 million.

Some accounts are more dramatic. Israeli daily newspaper, Haaretz reports that between 2005 and 2007 the PSE's daily turnover went from $12 million to $6 million.

Nowhere else in the region do political and security factors have such a heavy influence on the performance of the capital market.

Some of the exchange's success in 2005 can be put down to the financial excitement following Israel's withdrawal from Gaza, which was quickly overshadowed in early 2006 by Hamas' victory in the Palestinian elections.

Politics don't account for everything, according to Barghouti, who cites a lack of investor education as one of the major causes of the downturn in profits.

"A lot of individuals came to the market [in 2005] attracted by what we call 'goat theory.' That you hear from your neighbor, "buy these stocks and you will have a profit very quickly," and there were irrational investment decisions made by these investors," explains Barghouti.

From students to government workers, Palestinians from all walks of life invest at the exchange. In 2005, there was a stampede to get into investing and some people sold family jewelry and took out personal loans to buy stocks which then lost their value.

The PSE is trying to make sure that any Palestinians who invest in future will be better educated about how to do it -- which they hope will help to keep values on the exchange more stable.

"This was a project from our own money where we try to say that each investor should build his decision on accurate investment information ... we feel that we are generally improving the investment environment," said Barghouti.

The companies represented on the PSE also hope to attract "strategic investors" -- international investment houses from the Gulf States, Europe and the U.S -- to sink money in the exchange on a more long-term basis.

"If we succeed in convincing strategic partners to invest in the PSE it will be a very important step to have a sustainable improvement," explains Barghouti who thinks investors will be attracted by good margins and plenty of room for growth, despite the risks.

There are also plans afoot to take the exchange public in the hopes of attracting more investors but there is no timetable for this as yet.

Earlier this year there were signs of a boost to the economy in the West Bank following the Annapolis conference between Israel and the Palestinians in November 2007.

Western governments have resumed financial support to the Palestinians, pledging $7.7 billion over three years at a Paris conference in December 2007.

This sum is less than the $8.4 billion figure the UN Conference on Trade and Development estimates the stranglehold on Palestinian mobility cost them in lost income from 2000 to 2005.

The West Bank town of Nablus which the PSE calls home is a regular target of Israeli troops searching for Palestinian militants, causing the exchange to be closed down frequently.

The PSE still has a long way to go, says Munib Masri, chairman of Padico. He believes the biggest boost would be the end of violence and the establishment of a Palestinian state.

Masri told CNN that if the Palestinian Territories get stability and law and order then, "the limit is the sky."

But they continue to aim for another golden year despite the challenges.